America’s Economic Future

March 24, 2014 Updated: April 23, 2016

Eurozone countries have had their fair share of economic woes.  From Cyprus to Portugal to Ireland to Italy to Spain to Greece, austerity and bailouts have forced some to question the stability of the Eurozone and ponder its disbanding.  Portugal’s three year bail out is coming to a close in the near future and while their economy is more stable than it was three years ago, they are still in need of financial assistance.  The Economist notes that poor labor skills and lack of education must be addressed to increase sustainability in the future for Portugal.  “Given these vulnerabilities, Portugal would still benefit from a precautionary credit line from the euro zone’s rescue fund…As things stand, Portugal seems set to exit its bail-out without the safety net needed by an economy that is in better shape but remains fragile,” the report stated.

Aside from austerity, Eurozone countries have few options in which to quell their economic woes and devaluing currency is not feasible due to the monetary union the EU countries share.  The United States is not in as dire straits as the Eurozone but its economy is not as vibrant as economists had hoped it would be at this stage.  Federal Reserve Board Chair Janet Yellen last week gave her first press conference since assuming the chairmanship.  Yellen announced that the Fed will be continuing their taper of quantitative easing or QE by reducing Treasury and mortgage-backed securities purchasing by another $10 billion bringing the monthly total to $65 billion as opposed to the prior model of $85 billion a month.

The plan to start the taper began under former chairman Ben Bernanke and is continuing under Yellen.  The decision when to start the taper hinged on the state of the American economy and the unemployment rate.  Unemployment numbers are still not where economists want them to be and many believe the real unemployment number is somewhere around ten percent rather than six and a half because the unemployment rate only measures individuals who are actively searching for work – it does not account for those who have dropped out of the workforce.

Yellen also reaffirmed her commitment to keep interest rates down but stated that rates could increase as QE concludes, which could drastically affect the markets.  Poor numbers since January have really spooked investors and economists alike.  Yellen blames the poor weather and record low temperatures as a deterrent for some to go out and spend money.  As James Liu, global market strategist at JPMorgan Funds, said recently, “My opinion is the underlying growth trajectory of the U.S. economy is still really strong, but we spent the first three months debating whether it was the weather or a real slowdown.  If you can’t even get outside, it’s hard to buy a car.”

The House is reportedly expected to vote on a budget proposal in the near future.  The budget, authored by Paul Ryan (R-WI), will balance the national budget in ten years and stays true to 2015 spending levels negotiated by a bipartisan conference committee last fall.  The problem with the budget, according to The Hill, is it “would require dozens of conservatives to endorse a $1.014 trillion spending level that they opposed in December.”  Ryan’s proposed budget will make even more cuts to reduce the deficit in ten years.

The sequester was, and still is, very damaging to the American economy.  Since the cuts took place, budgets have used post-sequester rates rather than pre-sequester rates.  This is significant because lawmakers have not remedied the sequester in full.  Instead, piecemeal remedies have been offered to address key sectors thought to be dependent on additional funding but partisan gridlock appears to prevent a panacea to overall cuts.  So the United States is stuck with lower funding levels going forward.

Economists do not like austerity measures, which begs the question of what other measures there are to solve the problem.  There is still partisan debate over the success of the 2009 stimulus package.  Data points to the stimulus aiding, and not hurting the economy but as the New York Times noted of Yellen’s statements and policies displayed last week, “It was the first time the Fed officially predicted that the economy might not recover completely.”  A harsh realization that the economy is still fragile.

Reigning in big banks with regulations is also important.  Many economists believe the US is not better off five years after the collapse of Lehman Brothers and the banking crisis.  There are measures to reform Freddie Mac and Fannie Mae and recent lawsuits against banks such as JPMorgan have sent a signal to market manipulators (a weak signal equivalent to a slap on the wrist according to some but a signal nonetheless.)  Congressman Dave Camp (R-MI), chairman of the Ways and Means Committee, introduced legislation to reform the tax code.  His legislation has received criticism from conservatives and liberals.  Wall Street last week also issued a warning to Camp and his likely successor as chair of the Ways and Means Committee Paul Ryan, for their discontent with the proposal.  While it is not likely to pass, bankers want to ensure it is not reintroduced in the future.  Camp’s proposal would recommend a “special tax targeted at banks with over $500 billion in assets. The proposal would generate $86 billion in revenue over 10 years.”   Additionally, the bill would “lower the federal corporate tax rate from 35 percent to 25 percent, and would compress the seven individual income tax rates, ranging from 10 percent to 39.6 percent, to just three: 10 percent, 25 percent and 35 percent, with the latter hitting the one percent of individuals earning $400,000 and married couples earning at least $450,000.”

Reform is a necessary evil and lawmakers must take the initiative to ensure the stability of the American economy despite what the banking sector has to say.  While it appears that the American economy is stable at the moment, some economists believe the world is on thin ice given the fragility of the Eurozone, world markets, pending sanctions against Russia (which may affect global energy prices), and the Fed’s QE that potentially provides a facade of success.  When QE is fully tapered it will be interesting to see the real state of the American economy.  In the short term, lawmakers must address unemployment, and proper funding levels to mimic the Fed’s policy of reducing the unemployment numbers.  The US economy is bouncing back but it can still relapse.